17th January 2019
by Christian Bogaru, Managing Partner
Roll-over clauses
A form of clauses governing the continuation of the contractual relationship
I. Introduction
Although the legal outlines of contract formation and execution no longer suffer from fundamental uncertainties, we often move into unknown territory when we analyze, with precision, the mechanisms of contract termination and the post-contractual period. The termination of a contract can no longer be considered simply the conclusion of the agreement on an agreed date. Indeed, an examination of legal practice reveals that the temporal boundaries of contracts, and especially of international ones, are often imprecise and that “[…] the contractual relationship that was maintained and strengthened in the course of the years rarely ends in one day”[1].
Given the situation, we are witnessing a relativisation of one of the most basic, but important, elements of a contract, namely its term. Furthermore, a brief discussion on this contractual element becomes imperative, especially in the introductory part of this article. Thus, the concept of term indicates “the duration” for a contract or how long a contract remains enforceable. Certainly, terms of contracts vary widely and can be dictated by applicable law. Sometimes the parties sign the agreement, put the contract in a drawer, and go forward in the particular contractual relationship, ignoring the consequences of the term (until several years later when one party is looking to end the relationship even though neither party has breached the agreement).
A scenario that might be applicable reveals the situation in which a party tells the other party that it is terminating the relationship immediately, but the latter directs the former back to the term clause in the contract and reminds the former that the term is still ongoing due to the inclusion of a roll-over clause.
II.What is a roll-over clause?
A roll-over clause represents an automatic renewal provision which, when included in a contract, allows the contract to be extended beyond the initially agreed termination date. Instead of finishing the initial contractual relationship, the effects of the initial contract will be prolonged under the same conditions. Such a clause may be a key term in various contracts, but it is particularly prevalent in service, distribution and supply contracts, as well as in healthcare agreements. In a more empirical approach, roll-over clauses can be found in both consumer and commercial contracts, including Residential Lease Agreements, Advertising Contracts, Gym Memberships and many other service-based agreements. The question is whether these types of clauses are enforceable, as their effect is to automatically bind a contracting party to an agreement beyond the original contract term.
III. Are roll-over clauses enforceable? The position in Romania
Generally speaking, roll-over clauses are enforceable unless there is a provision in the country whose law governs the agreement prohibiting these clauses (continental law system) or there is case law in such country that refuses to enforce it (common law system) and it is not surprisingly at all that their enforceability can depend on the jurisdiction and the subject matter of the contract itself.
In some jurisdictions, the legislator considered it appropriate to prevent businesses from relying on these types of clauses unless notice is provided by the service provider. In this context it is imperative to mention that businesses should take care when concluding contracts that contain automatic renewal clauses, as abusive termination of the contract during a renewed term could generate a claim for damages for breach of contract.
Under Romanian law, the most widespread applicability of roll-over clauses is found in the case of contracts for provision of services. Quite often, there is a possibility that service providers (for example, internet, television or telephony service providers) may include an automatic renewal provision in the form of a so-called roll-over clause in contracts concluded with their clients, but this can only be considered lawful if a condition expressly provided by the Romanian legislation in force is respected.
Going further with this example and taking into consideration the fact that the initiation and continuation of a contractual relationship, in the form of the provision of services, implies at least two parties (namely two manifestations of intent), inherently the automatic renewal of a contract for the provision of a particular service, at the time of expiration of the predetermined contractual term, can not take place unilaterally (more precisely in the absence of the express agreement of the other contracting party).
Therefore, at least in the case of consumer contracts, the enforceability of roll-over clauses
is subject to prior notice, in order to prevent possible abuses of service providers. More specifically, according to the provisions of article 10, letter i) from the Government Ordinance no. 21/1992 regarding Consumer Protection, the consumer has the right to be notified “30 days before the date on which the contract is automatically extended for a fixed or indefinite period of time, in order for the consumer to make a written option regarding the extension of the contract.”
Failure by service providers to comply with this essential condition practically equals the impossibility of automatic renewal of contracts. Hence, the consumer has this right (to be informed 30 days before the date of the automatic renewal) and, in the absence thereof, the contract can not be automatically extended.
IV.Conclusion
Roll-over clauses may be beneficial to both parties of a contract, but each party should ensure that, when negotiating the agreement, they assess evaluate the benefits of the automatic renewal provision on a long-term basis. Such clauses may appear benign at first sight, but after careful evaluation of the potential consequences of the contractual relationship, a party may change its mind.
[1] M. FONTAINE, « Les contrats intemationaux à long terme », in Études offertes à Roger Houin. Problèmes d’actualité posés par les entreprise, Paris, Dalloz, 1985, p. 273.